Topics in Carbon Market Design: Power Sector Dispatch Reform and China’s National ETS

The Chinese government is preparing to launch a national emission trading scheme (for carbon) in 2017, two years after it began a major effort to reform its power sector. To be effective, these efforts should be carefully integrated, but thus far there has not been much coordination between them. This paper, written in both Chinese and English, lays out the argument for one element of power sector reform that is needed to facilitate a successful emissions trading system (ETS): reform of the dispatch system.

In most power systems across the world, dispatch of generation is done on an economic basis, in which generators are ranked on a merit order where the least costly generators come first. Renewable energy, with zero fuel cost and zero social cost of emissions, ranks first in such an order when it is available. In China, however, dispatch evolved along the lines of a centrally planned system in which generators receive annual allocations. This allowed the country to mobilize huge investment in expanding its power system to serve growth in industry and the economy, but it is now a significant inefficiency that limits the system’s ability to serve variable demand. Renewable resources, under this approach, are too frequently curtailed in favor of coal-fired plants that are using their allocations. This means that the carbon price signals needed under an ETS are not effectively transmitted through the power system. To make an ETS work, reform that looks toward a more economic system of dispatch will be a key element. Subsequent papers in this series will look at other needed aspects of sector reform.